Liquidation!?

Are you curious to know when an account is eligible for liquidation?

I got you covered ⬇️

Here is how different types of assets are valued and adjusted in the free collateral calculation on @NotionalFinance

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There are three types of assets on Notional: Cash, fCash, and nToken.

Cash is the underlying asset that you deposit or withdraw, such as DAI or USDC.

fCash is a future cash flow that you lend or borrow, such as fDAI or fUSDC.

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nToken is a liquidity provider token that you earn by supplying liquidity to the platform, such as nDAI or nUSDC. 💰

These assets are separately valued and determined if they are debt or collateral.

In the end, the buffer factor and collateral factor are applied to the Debt value and the Collateral value.

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Cash is the simplest asset to value.

Buffer factor and Collateral factor are only applied while calculating the free collateral subjected to a portfolio having only Cash.

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fCash is a bit more complex to value. It depends on the maturity date and the interest rate of the fCash.

The longer the maturity date and the higher the interest rate, the more risky the fCash is.

To account for this risk, Notional applies haircuts and buffers to the interest rate of the fCash. ✂️

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Haircuts and buffers are percentage adjustments that increase or decrease the interest rate of the fCash.

Haircuts are applied to positive fCash (+fCash), which means you are lending funds and earning interest. Buffers are applied to negative fCash (-fCash), which means you are borrowing funds and paying interest. 🔥

Haircuts and buffers adjust the fCash value based on the risks.

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For e.g, if you have +fDAI with an interest rate of 5%, Notional may apply a haircut of 1% to it, making it worth 4% in the free collateral calculation. This reduces your borrowing capacity.

Similarly, if you have -fDAI with an interest rate of 5%, Notional may apply a buffer of 1% to it, making it worth 6% in the free collateral calculation. This increases your debt obligation. 🚫

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nToken is the most complex asset to value.

It is a portfolio token that consists of a combination of +fCash, -fCash, and Cash for different maturity pools of underlying assets.

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To value nToken, Notional first converts each component of the portfolio into Cash using the same method as for fCash.

Then, it sums up the values of each component to get the total value of nToken.

It applies a collateral factor to nToken to account for its risk profile. 💰

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The collateral haircut for nToken depends on the volatility and liquidity of the underlying asset and the maturity pool.

For example, nDAI may have a lower haircut than nUSDC if DAI is more stable and liquid than USDC.

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Similarly, nDAI with a shorter maturity pool may have a lower haircut than nDAI with a longer maturity pool if there is more demand and supply for shorter-term liquidity. 🔥

After valuing and adjusting each asset in your portfolio, Notional sums up its values for each currency.

If the result is positive, it means you have net positive (+) assets for that currency and they are considered as collateral.

If the result is negative, it means the account is eligible for liquidation

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To calculate your free collateral, Notional converts each currency’s net value into ETH using the Oracle price feed and sums them up.

If the result is positive, you have free collateral that you can use to borrow more funds or withdraw as cash.